Simplify Small Business Accounting

NY Times: Groups Look to Simplify Small Business Accounting

Making accounting easier for small companies — and saving them the need to report some losses that big companies can face — has become a new preoccupation of the accounting profession, according to Floyd Norris in the New York Times.

The American Institute of Certified Public Accountants will announce this week that it is has created a “framework” that would simplify accounting for such companies. It would differ from the “generally accepted accounting principles,” or GAAP, that public companies must follow in a number of ways, large and small.

On the same day, the Financial Accounting Standards Board, which determines what those accepted principles are, plans to propose its first exceptions for private companies, companies whose securities are not traded publicly. Those exceptions are expected to deal with some of the same issues as the institute’s proposal.

“The framework is going to deliver tailored financial reporting for the small business community,” said Robert Durak, the institute official who led the effort to compile it. “It provides very meaningful, clear accounting.”

Some private companies have complained that preparing GAAP statements costs too much, with a considerable portion of the cost coming from rules that provided for disclosures that might be irrelevant. The companies say that because owners and lenders generally know one another, it is easy for them to arrange to get only the information they actually need, whether or not the rules require companies to provide it.

In the United States, unlike some European countries, there are no legally required accounting standards for most companies. The Securities and Exchange Commission requires that companies that sell securities in the public markets follow GAAP, but all others can use any form of accounting that the company and its creditors find acceptable. Many smaller companies just use tax accounting, because they must file tax returns like everyone else.

To win widespread acceptance, the institute framework would need support from two groups: accountants and bank lenders. “We think it will be a grass-roots-type of effort,” Mr. Durak said, where local certified public accountant firms “go to their clients and say, ‘This might be the right option for you. Let’s go talk to your banker.’ ”

Any company that chooses to adopt the framework would face new headaches if it ever decided to go public. Then it would have to redo its financial statements for at least two years to conform to accepted accounting principles. “The framework is not intended for companies that are looking to go public,” Mr. Durak said.

The changes being proposed for a new GAAP for private companies might prove less of a problem. Because they are presented as specific changes from the normal rules, it might be easier to reverse them if a company needed to do so to sell securities in public markets.

Efforts to get simpler accounting for smaller companies have been going on for years. In 2009, several accounting organizations appointed a “blue-ribbon panel on standard-setting for private companies.” In 2011, the panel recommended that “exceptions and modifications” be made to GAAP for private companies, but advised against “a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP.”

One dissenting member of the group contended that only companies that did not like some standards, not users of financial statements, were demanding changes.

As a result, the Financial Accounting Foundation, the parent of the standards board, set up a council to advise changes for private companies. It has recommended three changes, and the board is expected to propose them formally in an upcoming meeting.

One area where change appears to be coming is in accounting for good will, which is created when a company acquires another company for more than the tangible assets are worth. GAAP now requires periodic reviews to see if the good will is “impaired,” and needs to be written down, because the acquired operation has lost value.

The institute framework deals with that by saying such companies never need to review whether good will is impaired. The proposal from the standards board is slightly less permissive, allowing companies to avoid writing down good will unless it is clear the entire company is worth so little that there is no justification for having good will on its balance sheet.

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